Business context and reporting period
This is Transgenomic, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2016. The company’s continuing business was its Omaha laboratory, providing oncology analytical and pharmacogenomics research services and developing its MX-ICP mutation-detection technology. The filing reports its Genetic Assays and Platforms and Patient Testing businesses as discontinued operations. Transgenomic had agreed to merge with Precipio Diagnostics, LLC; the merger was pending when this report was filed.
Financial performance and position
| Metric | Third quarter 2016 | Nine months 2016 |
|---|---|---|
| Continuing net sales | $457,000; up 38% from $330,000 | $1.198 million; down 21% from $1.522 million |
| Gross profit (loss) and margin | $27,000; 6%, versus $(115,000); (35%) | $(279,000); (23%), versus $147,000; 10% |
| Operating loss from continuing operations | $(1.618) million, versus $(2.256) million | $(5.736) million, versus $(6.625) million |
| Net loss, including discontinued operations | $(1.926) million, versus $(7.299) million | $(6.187) million, versus $(13.615) million |
Third-quarter revenue growth came from higher grant revenue; contract laboratory-services sales were flat. Nine-month sales declined because fewer customers had active projects, partly offset by grant revenue. Management attributed the nine-month gross-margin deterioration to revenue too low to cover fixed laboratory costs. Lower selling, general and administrative and research and development expenses helped reduce continuing operating losses. Interest expense increased to $782,000 for the nine months from $550,000.
Cash and cash equivalents were $71,000 at September 30, down from $444,000 at year-end 2015. Nine-month cash used in operating activities was $3.574 million, including $3.955 million used by continuing operations; investing activities provided $1.006 million, largely from discontinued operations, and financing activities provided $2.195 million. Working capital was negative $17.394 million, and stockholders’ deficit was $17.824 million. Total debt was $7.814 million, all classified as current; current liabilities totaled $18.260 million.
Material changes, outlook and risks
- Liquidity and going concern: Management stated that substantial doubt exists about the company’s ability to continue as a going concern. It said it did not expect to have sufficient cash for at least the next 12 months and identified revenue growth, improved collections, asset sales and additional financing as potential needs, with no assurance those measures would succeed.
- Debt default: The company had not made required monthly interest payments to its secured lenders during the third quarter and had not obtained a waiver. The lenders could stop advances, accelerate repayment or enforce their security interest in company assets. All debt was classified as current as a result.
- Discontinued operations: Nine-month discontinued-operation sales were $1.960 million, compared with $17.868 million in 2015, reflecting the divestitures and suspension of Patient Testing. Discontinued operations reported a $25,000 net loss for the 2016 nine-month period, including about $1.1 million in asset-sale proceeds.
- Merger and listing: The October 12 merger agreement contemplated Precipio unit holders receiving 62%–80% of the combined company’s common stock, subject to the agreement’s terms, and a financing that included $3 million of preferred stock for Transgenomic lenders and up to $7 million for cash investors. Completion depended on approvals, financing and other conditions. Nasdaq granted continued listing through December 31, 2016 subject to conditions, including merger completion and post-merger listing approval. Stockholders separately authorized, but did not require, a reverse split at a ratio between 1-for-10 and 1-for-30.
- Other risks and unusual items: The company disclosed lawsuits by the University of Nebraska and Mount Sinai, each seeking about $700,000 and matched by recorded liabilities, and a Fox Chase lawsuit for which it could not estimate potential loss and recorded no accrual. Equity financing and conversions increased the share count; 8.976 million warrants were outstanding at quarter-end. The filing also describes substantial potential dilution and possible cash obligations under certain warrant exchange provisions.
The filing provides no formal revenue or earnings guidance. Management described efforts to improve operating results and collections and monetize underused assets, but cautioned that execution and financing were uncertain. Business highlights included a Ventana data-sharing agreement and new ICEme kit distributors in China and India.
Important facts for investors to verify
- Whether the merger and associated preferred-stock financing closed, on what final terms, and whether the combined company secured Nasdaq listing.
- Whether the secured lenders waived or otherwise resolved the missed interest payments and default, and whether debt was repaid, refinanced or accelerated.
- Available cash, ongoing cash burn, near-term obligations and the company’s ability to fund operations beyond the period covered by the going-concern warning.
- Subsequent revenue, active laboratory projects, grant income and gross margins, given the low sales base and negative nine-month gross margin.
- Developments in the three disclosed legal matters, potential exposure beyond recorded liabilities, and the dilution or cash-payment impact of outstanding warrants and future financing.